Abstract

The rational expectations hypothesis has been criticized for imposing substantial demands on economic agents, and this problem has not been sufficiently solved by introducing a learning mechanism. I present a new approach to this problem by assuming that households behave on the basis of not the rate of time preference but the capital-output (income) ratio. I show that households can equivalently reach and stay at a steady state without doing anything equivalent to computing a complex macro-econometric model. Although households are not required to implement anything difficult, they look to be behaving fully rationally, led by an “invisible hand.”

Piketty, Thomas (2013) Le Capital au XXIe siècle translated by Arthur Goldhammer in English in 2014 with the title Capital in the twenty-First Century Capital in the Twenty-First Century, Belknap Press of Harvard University Press, Cambridge, MA.